Zimbabwe is considering a significant move to stabilize its currency by backing it with gold, according to Finance Minister Mthuli Ncube.
This consideration comes as part of an ongoing effort to address the exchange-rate instability that has plagued the country for years. In a recent online briefing, Ncube highlighted the potential benefits of linking the nation’s currency to a tangible asset like gold.
This announcement was made ahead of a conference of African ministers that Zimbabwe is set to host later this month.
President Emmerson Mnangagwa also hinted at a major overhaul of the Zimbabwean currency, which has been the worst-performing globally.
The government, alongside Treasury and monetary officials, is reportedly crafting a “structured currency” to combat the financial turmoil.
Since reintroducing the Zimbabwe dollar in 2019, after a decade-long hiatus due to hyperinflation, authorities have experimented with various measures, including gold coins and digital tokens backed by bullion, to salvage the currency’s value.
However, these efforts have not been successful in halting its decline, drawing criticism from entities like the International Monetary Fund.
In addition to exploring a gold-backed currency, Zimbabwe is also considering the establishment of a currency board as a potential solution to the currency’s volatility. Ncube’s discussion of a currency board follows President Mnangagwa’s recent policy guidance aimed at reforming the country’s currency and monetary strategies.
Experts, such as Mlotshwa from IH Securities in Harare, believe that a properly implemented currency board could indeed help manage the fluctuating exchange rate.
What is a Currency Board?
A currency board is a monetary authority that issues a local currency fixed to a foreign currency at a specified exchange rate. Unlike central banks, which have discretionary powers to formulate monetary policy, a currency board operates on a rule-based system, committing to convert its local currency on demand into the foreign currency to which it is pegged, at the predetermined exchange rate. This system requires the currency board to hold foreign reserves at least equal to its issuance of domestic currency, ensuring that the fixed exchange rate can be maintained.
In the context of currency exchange rate management, a currency board aims to provide stability to a country’s currency by tying its value directly to that of a more stable, widely accepted foreign currency. This linkage can help to reduce inflation and instill greater confidence among international investors and local stakeholders in the stability of the local currency.
This move to possibly anchor the Zimbabwean dollar to gold, along with the contemplation of a currency board, represents a critical juncture for Zimbabwe as it seeks to restore confidence in its currency.
The Zimbabwe dollar’s drastic depreciation—nearly 50% against the US dollar this year after a 90% drop in 2023—underscores the urgency of finding a sustainable solution to the country’s economic challenges.
As the nation awaits the outcome of these considerations, the global community watches closely, hopeful for a strategy that can provide stability and growth for Zimbabwe’s economy.
Supporting article: https://www.bloomberg.com/news/articles/2024-02-12/zimbabwe-dollar-may-get-gold-backing-finance-minister-says
